Market correction ... Just as I plan to ER

[Steelart99]

I've never really defined my asset allocation but tend to stay around 70/25/5 equity/bond/cash. I've been a bit aggressive with this and done fairly well ... but my risk aversion is on the rise. I've been somewhat planning to ER in 2016 but fear doing so just after what many feel is an upcoming market correction. All our investments are in 401K / IRAs with about 1 year cash "stash" and a couple of smaller non-COLA pensions. Per various calculators we have better than a 90% success rate (about $1M total valuation and post-ER expenses at $55K - $60K before tax).

So, is there something we should do to reduce our exposure before/during a market correction ... I've always heard that having that happen in the first few years of ER can be devastating. Is it sufficient to adjust my AA to something closer to 50/50 or 60/40 and just hold on during the ride? Or would it be prudent to lock in some value by moving at least a part of our assets to a stable value fund or equivalent?

Any thoughts / ideas are appreciated.

 

[papadad111]

Most here do not recommend that you try to time ins and outs of the market.

So, Set you asset allocation percentages and then stick with it through the downs and ups.

A cash reserve is handy. An asset allocation closer to 50/50 is more conservative than 70/30 as well.

 

[Moemg]

So, is there something we should do to reduce our exposure before/during a market correction ... I've always heard that having that happen in the first few years of ER can be devastating. Is it sufficient to adjust my AA to something closer to 50/50 or 60/40 and just hold on during the ride? Or would it be prudent to lock in some value by moving at least a part of our assets to a stable value fund or equivalent?

Any thoughts / ideas are appreciated.

I retired in 2008 just as the market slide began & the mistake I made was not having at least two years in cash . Otherwise stock up on wine and hang on for the market rides.

 

[Cut-Throat]

Well, if you are saying that you have 'enough' money now, why risk it with a heavy stock portfolio? I have plenty of money and have 'won the game' and am 30/70 ...Stocks/Bonds.... But, I don't need to Grow my Portfolio. I am happy spending it down.

So, what is your objective by being 70% in stocks and being retired? If you have a Pension and can live on that alone and are trying to leave your heirs a bigger nest egg, that could be a valid objective.

 

[trapperjohn]

I agree with Moemg. Increase your cash holdings to equal what you would normally withdraw over 2-3 years, and live off of that if the market corrects.

Since you said you had a couple pensions or other income streams, it's important to note that you don't need the cash balance to equal your estimated living expenses. Rather you only need a cash balance equal yo what you would normally withdraw from your investments over 2-3 years. Your other income streams and pensions will (presumably) not be affected by a market correction, so you don't have replace them if the market dives.

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[RetireAge50]

I think it depends on if you are ok with a variable income. A 20% market correction would only reduce your income about 11% temporarily given the following income sources:

80% Portfolio 70/25/5
20% Pensions or SS

Income adjustment:
Stocks 70% * Income Weight 80% * Market Correction 20%=11.2%

 

[Steelart99]

Thanks for the input so far. My pensions will only cover about 1/3 of my expenses and SS at the earliest is 5-6 years away. It sounds like I should be more risk adverse and change my allocation ... something I'd been eying for a year or so anyway. Guess I didn't think to increase my cash holdings to cover any market downturn ... Doh ... sometimes the obvious get right by me ... sigh. I really don't "intend" to do market timing, just hate to take a hit just as I'm ER'ing.

 

[Travelwanted]

Thanks for the input so far. My pensions will only cover about 1/3 of my expenses and SS at the earliest is 5-6 years away. It sounds like I should be more risk adverse and change my allocation ... something I'd been eying for a year or so anyway. Guess I didn't think to increase my cash holdings to cover any market downturn ... Doh ... sometimes the obvious get right by me ... sigh. I really don't "intend" to do market timing, just hate to take a hit just as I'm ER'ing.

You may consider dollar cost averaging into bonds right now. If you haven't noticed bonds are sliding and have been so for the past couple months. Many of us are expecting a rate hike in Sept. That will mean higher yields, but bond value will drop. Over time this will be ok provided you aren't heavy into long-term bonds.

 

[Independent]

Thanks for the input so far. My pensions will only cover about 1/3 of my expenses and SS at the earliest is 5-6 years away. It sounds like I should be more risk adverse and change my allocation ... something I'd been eying for a year or so anyway. Guess I didn't think to increase my cash holdings to cover any market downturn ... Doh ... sometimes the obvious get right by me ... sigh. I really don't "intend" to do market timing, just hate to take a hit just as I'm ER'ing.

I retired before I started SS. We had assets in low risk stuff (CDs and I-bonds) earmarked to cover the heavy withdrawals in those pre-SS years.

 

[Davis65]

If you are sure there will be a market correction, then cash out everything now, wait for the fall and buy back in. You'll make a killing. Of course if you're wrong then you will miss out on the continued growth that other investors are getting. You can only be sure if you are smarter than the market, which I wouldn't bet on. I don't think I can outsmart the market, so I'll remain invested and keep drawing my dividends. For protection, I will keep a nice cash cushion in CDs so that I don't have to sell my dividend stocks in a down market.

 

[gcgang]

Well, if you are saying that you have 'enough' money now, why risk it with a heavy stock portfolio? I have plenty of money and have 'won the game' and am 30/70 ...Stocks/Bonds.... But, I don't need to Grow my Portfolio. I am happy spending it down.

So, what is your objective by being 70% in stocks and being retired? If you have a Pension and can live on that alone and are trying to leave your heirs a bigger nest egg, that could be a valid objective.

+1

How low can you go in stocks and still have an acceptable success %?

Once you've won the game, why keep playing?


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[LOL!]

I see no reason not to change your asset allocation to 60/40 tomorrow. Believe me, such a change will make a huge difference in your risk aversion. You have those pensions which also helps, but since you started this thread and are asking, it does mean you are not quite comfortable with where you have your asset allocation now.

If you don't want to get to 60/40 all at once, try 65/35. I found that even 5% change was helpful to me.

 

[Rick_Head]

..... but fear doing so just after what many feel is an upcoming market correction. ...

Doesn't that make you a DMT?

Do you think a correction is coming and if so why? Do your own DD and don't worry about what the others (talking heads) say.

 

[samclem]

. . . but my risk aversion is on the rise. I've been somewhat planning to ER in 2016 but fear doing so just after what many feel is an upcoming market correction.

With this reasoning you might never get to retire--you'll always be worried it's the wrong time because stock prices are up (and therefore a correction is "just around the corner") or they are beaten down ("I need to work until the stock prices recover to avoid selling shares when they are low").
First, I'd check to see how much a reduction in your portfolio will really hurt your quality of life (assuming you are using a "% of year end balance" approach). If your expenses are flexible ( i.e. you can pay the "must do" bills with a 2% WR, but no Europe trip this year. Do a week in Las Vegas instead), then a temporary downturn might not not hurt you and volatility isn't a major concern.
But if a hit to the portfolio value and annual spending is gonna really affect you, consider decreasing your stock allocation permanently or reduce stocks to 40-50% and then dollar-cost average back to 70% over the first few years of your retirement until (historical) market returns can help you build a cushion. If the market goes down, at least you'll be buying new shares at cheaper prices, and you'll eventually benefit even more as prices go up. Maybe that will give you the emotional support you need to pull the plug.

But, on average, going to a lower stock allocation--short term or long term--does decrease your overall expected returns and your chances of staying ahead of inflation.

 

[UnrealizedPotential]

Market corrections come like a thief in the night.

 

[audreyh1]

You should gradually transition to whatever allocation you plan to use during retirement. You might be able to do this by just adding new money to the assets that are underrepresented for your target retirement allocation, or you might have to so do some rebalancing.

Many of us keep a couple of years spending money in a cash equivalent not subject to market volatility.

 

[Totoro]

First off: Realize that statistically speaking one is more likely to retire just before a crash.

A high portfolio is a function (partially) of a good return. That return means you had some good years recently. And many good years mean it is likely some bad years soon will follow.

Second: +1 on the posts that encourage you to take off some risk if you lie awake right now.

Set your target allocation such that a 30% drop in the market will not cause you to sleep bad at night, or worry much about your financial future. Or if you invest in individual stocks, allocate some that do well in bear markets (typically consumer goods, tobacco).

Third: Once the drop is there (and it will come), have fun and the courage to rebalance or dollar-average back into equity markets.

Fourth: If you have won the game, no sense in risking your victory.

Good luck deciding .. and don't worry about when the market will drop. It's out of your control anyway. Look within for comfort

 

[big-papa]

Wade Pfau and Michael Kitces did a study a couple of years ago that indicated reducing equity as you approach retirement, then increase equity as you go through retirement - the idea being to reduce overall risk in just such an event of a market correction just after retirement starts.
Reducing Retirement Risk with a Rising Equity Glide-Path by Wade D. Pfau, Michael E. Kitces :: SSRN

 

[Steelart99]

I appreciate all the thoughts (and pokes for MTing ... ). It has helped me move on increasing my cash fund beyond the 1 year I have now (obvious in retrospect) and to also approach a change to my AA. Generally speaking, I have not modified my AA regardless of what the market is doing, just got concerned about a correction happening just as/before/after I planned my ER.

 

[Willers]

Wade Pfau and Michael Kitces did a study a couple of years ago that indicated reducing equity as you approach retirement, then increase equity as you go through retirement - the idea being to reduce overall risk in just such an event of a market correction just after retirement starts.
Reducing Retirement Risk with a Rising Equity Glide-Path by Wade D. Pfau, Michael E. Kitces :: SSRN

If you consider this strategy understand that Pfau has changed his opinion on this somewhat in the face of additional data he hadn't considered:

To Rise or Not To Rise: Stock Allocation During Retirement